Investing using an IRA-Owned LLC

1. Ownership: 

• The self-directed IRA is the sole member of the LLC.  

• The LLC is treated as a disregarded entity for tax purposes if it is single-member, meaning income and gains flow directly to the IRA without requiring an additional tax filing for the LLC. 

• For multi-member IRA LLCs (e.g., multiple IRAs or investors owning the LLC), the entity is treated as a partnership, which requires the filing of a partnership tax return (Form 1065) and issuance of K-1s to members. 
   

2. Management: 

• The IRA holder serves as the LLC’s non-compensated manager, controlling its checkbook and investment decisions. 

• The manager is prohibited from receiving compensation or benefits for managing the LLC, as this would constitute a prohibited transaction. 
• The IRA holder can sign contracts, execute purchases, and manage expenses directly through the IRA owned LLC’s bank checking account, eliminating the need for custodian processing in day-to-day transactions. 
   

3. Compliance: 

• The LLC must strictly avoid prohibited transactions as outlined by the IRS under IRC Section 4975. Prohibited transactions include: 

• Self-dealing (e.g., using LLC assets for personal benefit). 

• Transactions with disqualified persons (e.g., transactions or payments to the IRA holder, their spouse, or certain family members). 

• Providing indirect benefits to disqualified persons. (e.g. allowing a disqualified person such as the IRA owner’s child to live at a rental property owned the the SDIRA or IRA LLC.  

• The LLC’s operating agreement must include specific language to ensure compliance with IRS regulations regarding IRA-owned entities. 

• Investments must remain at arm’s length, and personal and LLC activities must remain entirely separate to avoid jeopardizing the tax-advantaged status of the IRA. 

4. Funding: 

• The IRA funds are invested from the custodian (Directed IRA) to the LLC’s business checking account. This investment is treated as a capital contribution and is not considered a taxable distribution. The IRA is then the owner of the LLC and on the IRA account’s records and statements, and the LLC is an asset of the IRA.  

• All investment income (e.g., rental income, profits from asset sales) and expenses (e.g., property taxes, repairs) must flow e through the LLC’s business checking account. 

• Personal funds cannot be commingled in the LLC account. 
   

5. Investments: 

• The IRA LLC structure allows investments in a wide variety of alternative assets, such as real estate, private businesses, tax liens, foreign investments, precious metals (meeting IRS purity standards), and more. 

• Investments must align with IRS guidelines. For example, buying collectibles (e.g., artwork) or life insurance policies is prohibited. 

• If the LLC generates UBTI or Unrelated Debt-Financed Income (UDFI), the IRA must report and pay taxes using Form 990-T. 
   

6. Reporting: 

• Provide an annual update to your IRA custodian on the  value of the LLC so that the IRAs record of value is accurate.  

• Multi-member LLCs require the filing of a partnership tax return (Form 1065) and distribution of K-1s to members. 

• Single-member LLCs are disregarded entities for tax purposes and are not required to file a federal tax retrun.   
   

7. Liability and Legal Considerations: 

• The LLC structure provides a layer of liability protection between the IRA, the IRA owner, and the LLCs  investments. For example, if the LLC owns real estate and is sued by a tenant, the IRA’s other assets as well as the IRA owner’s other assets remain protected. 

• The LLC must follow all state filing requirements, including registering the LLC with the Secretary of State, maintaining an agent for service of process, and filing annual reports or renewals as required by state law. 
   

8. Tax Implications: 

• While the IRA itself is tax-deferred (or tax-free for Roth IRAs), certain activities within the LLC may trigger taxable events, such as: 

• UBTI, which occurs when the LLC earns income from an active trade or business (e.g., operating a business within the LLC). 

• UDFI, which applies when investments are financed with debt, such as a mortgage on a rental property. 

• Any tax liability must be paid from the IRA’s funds, not personal funds, to maintain compliance with IRS rules.